Starting from Long-Run Equilibrium in the Dynamic Model of Aggregate

question 7

Multiple Choice

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a temporary five-period tax increase causes output to _____ until returning to the natural level in the long run.

• A) remain continuously above the natural level of output
• B) move above and then below the natural level of output
• C) remain continuously below the natural level of output
• D) move below and then above the natural level of output.

---

Definitions:

Taxable Income

Taxable income is the portion of an individual's or a company's income used to determine how much tax they owe to the government in a given tax year.

Single Individual

Pertains to one person or entity, distinguishing from groups or multiple entities.

Marginal Tax Rate

The percentage rate at which your final dollar of earnings is taxed, denoting the tax percentage applied to your income within each tax bracket you fall into.

Regressive Tax System

A tax system where the tax rate decreases as the taxable amount increases, placing a higher burden on lower-income individuals.